Absolute return strategies surging in popularity

Principal at Mercer Investments, Sue Wang says her clients are only now increasing their allocation to absolute return strategies, despite having them in their portfolio for many years. She adds that where her clients may have previously used one manager for absolute return investments, they’re now expanding to between two and four managers.

“We should see more volatility in markets and capital being drawn, and that’s the environment where pure alpha-type trades are more likely to add value,” Wang says. “We’re really at the pointy end of the market, where we can see that rates are rising and look like they’ll continue to rise, so this is an environment where traditional benchmark-aware strategies will finally suffer and these absolute return strategies should come to the fore.”

Benchmark-aware products have done well since the global financial crisis and strategies around those products rode the bond bull market for some time, Wang explains. This led to absolute return strategies underperforming index-heavy strategies over the same period. However, the bull run is coming to an end and the environment is becoming more favourable for absolute return managers, Wang says. She notes that while clients are allocating more to this part of their portfolios, they also want more diversity.

“It’s a time where there’s so much more competition in the space, with so many more managers, that we can identify quite different styles of absolute return investing,” Wang says. “There are enough strategies out there to put together an intelligent portfolio of quite diversified styles.”

Wang says the increasing competition among managers that adopt absolute return strategies has led some to create more complicated approaches.

“There are significantly more managers in this universe now, so to be able to compete with all the other funds out there, managers have had to demonstrate that they’re more sophisticated,” she explains. “Managers also feel the need to show they are getting better at this and have had to bring in the right skill set [to compete]. For example, we’ve seen fund managers bring in more resourcing from hedge funds, so you do have people with that type of mindset entering into long-only bond businesses to increase capability there.”

Investors are also increasingly aware that fixed income benchmark-aware approaches are flawed, Wang adds. She says this recent dislike of benchmarks has pushed investors toward unconstrained, benchmark-agnostic strategies.

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